CHANCELLOR George Osborne faced calls to quit after Britain’s prized AAA credit rating was downgraded but vowed to redouble his efforts to put the nation back on the road to recovery.

Ratings agency Moody’s cut the rating amid fears the UK’s ballooning levels of debt would leave it dangerously exposed to another economic shock.

The downgrade, the first since 1978, is not expected to spook the markets but is a political disaster for the Chancellor who staked his reputation on maintaining the gold-plated status.

Shadow Chancellor Ed Balls described it as a “humiliating blow” while Left-wing economist David Blanchflower called for him to resign.

Critics on the Right renewed calls for sweeping public sector cuts and major supply side reform to stimulate growth.

The Chancellor, less than a month away from his crucial March 20 Budget, said he would not be blown off course.

The credit rating agency warned UK debt would peak at 96 per cent of GDP by 2016

“Far from weakening our resolve to deliver our ­economic recovery plan, this decision redoubles it. We will go on delivering the plan that has cut the deficit by a quarter and given us record low interest rates and record numbers of jobs.”

Critics on the right maintained Moody’s decision proved the Chancellor had already been blown off course with public sector debt continuing to rise.

The credit rating agency warned UK debt would peak at 96 per cent of GDP by 2016, though some rating agencies think it may go higher.

Mark Littlewood, director general of the Institute of Economic Affairs, said it should serve as a wake-up call to the Chancellor to slash public spending to fund tax cuts.

“The stranglehold of regulation is hurting business prospects on almost every front,” he said. “In the lead-up to the budget Osborne would be wise to respond by taking urgent action.”

Mr Balls said credit rating agencies were largely discredited after being caught sleeping on the job in the run-up to the credit crunch.

However, he insisted Moody’s announcement was a political body blow to a ­Chancellor who had made Britain’s triple A status the benchmark of his economic credibility.

The Chancellor staked his reputation on maintaining Britain's AAA status

“This is a very tough economic situation, you don’t have to tell me that, but we’ve got to confront those problems head on,” he said.

“For families who say, ‘What does this mean for me?’ my message is very clear: Britain’s got to tackle its problems, it’s got to tackle its debt issues, so that we can have low interest rates for people who want a mortgage, low interest rates for the person who wants to take out a loan to start a business, low interest rates so we go on creating jobs in the way that we have done in the last couple of years.

“What is the alternative? The alternative you hear from the Labour Party today is that we should be borrowing much more. I would say that is exactly the wrong response. I would say that’s exactly the response that would take a bad situation and make it very, very, very much worse.”